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LLC vs. Corporation: Which is Right for Startups?

If You’re Starting A Startup:

If you’re starting a startup, and you want to deal with equity, you’ll need to start something known as a C-Corp.*

The two major ways you can create a company are as a C-Corporation (C-Corp for short) or a Limited Liability Company (LLC). If you want to have equity in your company, then you shouldn’t start an LLC. An LLC is just for multiple partners owning a business. A C-Corp will let you take investment and have equity in your company.

Another important thing about a C-Corp is that you’ll have a Board of Directors. That might start out as just you and your Co-Founder, but as you grow and get more investors, they may join as board members as well.

For now, you probably don’t need to know about A-Corps or B-Corps (but if you want to geek out, we won’t stop you from Googling). Focus on LLC vs Corporation.

*Of course, for questions specific to your particular situation, it’s best to seek the advice of an attorney or accountant.

Key Takeaways:

  • If you want to take investment (and have equity in your company), you’ll need to start a C-Corp.
  • The two main forms of company structure are C-Corp and LLC.

Why Should You Incorporate Your Startup In Delaware?

Startup Series: Why Delaware?

Why should you incorporate your startup in Delaware, even if you’ve never been there?*

A whole lot of companies in the US are incorporated in Delaware, even if the company doesn’t actually exist there. One Month, for example, is incorporated in Delaware, even though we’re headquartered in New York (and we’ve never been to Delaware)!

The reason? There’s a body of law in Delaware where many court cases have already been tried, so companies and potential investors have more certainty about how different legal disputes will turn out. It’s riskier to incorporate your startup in a state where the outcomes for legal problems don’t have any legal precedent, and it’s unclear what would happen if a case were to go to court.

For investors, it’s also more attractive for them if they know you’re incorporated in Delaware, because this gives them more certainty. If your business has a legal question and it needs to be figured out in the court system, investors prefer the certainty of knowing that previous cases have established precedent (known as case law) in this state.

*Of course, for questions specific to your particular situation, it’s best to seek the advice of an attorney or accountant.

Key Takeaways:

  • Ideally, you’ll be incorporated in Delaware (you don’t have to live there to incorporate there) because many of the laws and cases have already been figured out
  • The steps to incorporating a business are fairly simple, and there are people who can do it for you.
  • If you try to do it the manual way, it can be more complicated, but still do-able.

More Links:

Startups + Fundraising Series:

Learn How to Launch An MVP In One Minute

Key Takeaways

A Minimum Viable Product centers upon the idea that you should release a new product ASAP. Don’t spend nine months building all the features. Instead, build the most important features — just enough to learn whether or not people even want the thing you’re making.

Repeat after me: an MVP means getting the most learning for the lowest amount of effort. Ask yourself, “How can I get this product in front of people as quickly as possible?”

Example of Minimum Viable Product in action

  • Dropbox started as an MVP
  • Here at One Month, we use Launchrock to build a landing pages, and to collect email addresses for classes that aren’t yet in development. This helps us learn which classes are most in demand.

How to Learn to Build an MVP Today

  1. Steve Blank, and Eric Reis: Read about the experts and follow them on Twitter (5 minutes).
  2. Data Drive Products Now! (slideshow): Check out this cool case study from on Etsy developer Dan McKinley (12 minutes).

Additional Resources

If You’re Not Embarrassed By Your Startup, You Launched Too Late

“If you’re not embarrassed by the first version of your product, you’ve launched too late.” — Reid Hoffman

If your startup is successful, no one will remember how ugly your product looked the day you launched. (And if it’s not successful, no one will care.)

When we think about successful companies like Google, Facebook, and Twitter, we tend to forget the modest beginnings from which they came. As Paul Graham recently wrote, “Think of some successful startups. How many of their launches do you remember?”

In celebration of modest beginnings, here’s a dose of reality: I recently came across the landing pages of some of the most successful companies we know. This is something everyone should see.

The moral of the story: don’t name your company BackRub. Also, don’t worry about making something pretty, worry about making something people love. As Reid Hoffman (the founder of LinkedIn) once said, “If you are not embarrassed by the first version of your product, you’ve launched too late.”

It’s easy to say “have a growth mindset,” and “follow lean startup principles.” It’s a lot harder in reality, when you have to launch quickly, and put out versions of your product that feel unfinished, raw, or even ugly. Take a look at the startups below, and how they launched their first product — and maybe you can launch a little earlier. Or a lot earlier.

(Credit goes to Phil Pickering for finding these.)

Twitter’s first landing page:

Early Facebook screenshot:

Early Google homepage (from 1997):

The precursor to Google, BackRub:

An even earlier Google homepage:

Yahoo!’s homepage in 1994:

Early tumblr dashboard screenshot:

Early Amazon homepage screenshot:

Apple circa 1997:

AuctionWeb before it became eBay:

Burbn (a Foursquare clone) before it pivoted to… Instagram:

The first ever prototype of Foursquare (shown at SXSW in 2009):

Reid Hoffman’s original LinkedIn:

And finally… Reddit (some things never change):

What stands out to you? How would you have designed things differently?

It’s easy to think that you need to have a great design and get everything polished before you release it to the world. In reality, you should launch things as soon as you can, as quickly as you can, to get validated learning. The Lean Startup talks about this as validated learning — getting immediate feedback from users as to what they actually want, not assuming you know all the answers.

How can you launch a beta version earlier? Why is getting feedback on a somewhat-shitty design more valuable than perfecting a design that no one wants? Post your thoughts in the comments below.

Famous First Landing Pages

“If you’re not embarrassed by the first version of your product, you’ve launched too late.” — Reid Hoffman

If your startup is successful, no one will remember how ugly your product looked the day you launched. (And if it’s not successful, no one will care.)

When we think about successful companies like Google, Facebook, and Twitter, we tend to forget the modest beginnings from which they came. As Paul Graham recently wrote, “Think of some successful startups. How many of their launches do you remember?”

In celebration of modest beginnings, here’s a dose of reality: I recently came across the landing pages of some of the most successful companies we know. This is something everyone should see.

The moral of the story: don’t name your company BackRub. Also, don’t worry about making something pretty, worry about making something people love. As Reid Hoffman (the founder of LinkedIn) once said, “If you are not embarrassed by the first version of your product, you’ve launched too late.”

It’s easy to say “have a growth mindset,” and “follow lean startup principles.” It’s a lot harder in reality, when you have to launch quickly, and put out versions of your product that feel unfinished, raw, or even ugly. Take a look at the startups below, and how they launched their first product — and maybe you can launch a little earlier. Or a lot earlier.

(Credit goes to Phil Pickering for finding these.)

Twitter’s first landing page:

First Version of Twitter Website

Early Facebook homepage:

First Version of Facebook Website

Early Google homepage (from 1997):

First Version of Google Website

The precursor to Google, BackRub:

First Version of BackRub Website

An even earlier Google homepage:

First Version of Google Website

Yahoo!’s homepage in 1994:

First Version of Yahoo Website

Early tumblr dashboard screenshot:

First Version of tumblr. Website

Early Amazon homepage screenshot:

First Version of Amazon Website

Apple circa 1997:

First Version of Apple Website

AuctionWeb before it became eBay:

First Version of eBay Website

Burbn (a Foursquare clone) before it pivoted to… Instagram:

First Version of burbn Website

The first ever prototype of Foursquare (shown at SXSW in 2009):

First Version of FourSquare Website

Reid Hoffman’s original LinkedIn:

First Version of Linkedin Website

A very sterile version of Netflix (before you could stream):

First Version of Netflix Website

Nike (circa 1998):

First Version of Nike Website

Ashley Madison (long before they were hacked):

First Version of Ashley Madison Website

Pizza Hut (circa 1997):

First Version of Pizza Hut Website

Barnes & Noble (circa 1999):

First Version of Barnes & Noble Website

Best Buy (circa 1997):

First Version of Best Buy Website

Target (keeping things incredibly simple):

First Version of Target Website

American Eagle (if the Dawson’s Creek reference doesn’t age it…):

First Version of American Eagle Website

Shopify (the early years of e-commerce):

First Version of Shopify Website

And finally… Reddit (some things never change):

What stands out to you? How would you have designed things differently?

It’s easy to think that you need to have a great design and get everything polished before you release it to the world. In reality, you should launch things as soon as you can, as quickly as you can, to get validated learning. The Lean Startup talks about this as validated learning — getting immediate feedback from users as to what they actually want, not assuming you know all the answers.

What Are Convertible Notes and Why Use Them?

Throughout our previous entries on raising funds as a startup, we’ve been talking about raising money for your company by sharing equity with venture funds.

When you’re a company in its early days, sharing equity is difficult. Moving equity from your company to another requires a lot of time to hash out an agreement everyone can live with and it requires lawyers to work out the actual contracts. The whole process can cost upwards of $50-$100K, which is a lot of money for a company still looking for its first round of seed money.

Rather than dealing with the hassle of transferring equity, a lot of venture funds find it better to offer funding to startups using convertible notes.

Convertible notes are debts that convert into equity when a startup raises an actual equity round of funding. In essence, the venture fund offers to give you a loan of whatever amount, but instead of paying them back in actual money, the startup agrees to pay them in preferred equity. The venture fund gets the same agreement as whoever has invested in the series A round, with a bit of a discount as a good faith offer for investing earlier.

Early investing venture funds often find working with convertible notes preferrable to working with equity transfer for a few reasons:

For one, issuing a convertible note is easier. It can take weeks of discussion to transfer equity, but you can really issue a convertible note in only a couple of days. They also make it easier for the venture fund to work out the valuation of the startup by putting the discussion off until the series A round, when there is actual data to base their valuation on (rather than just a hunch). That considerably lowers the risk of their investment.

For startups, the convertible note also simplifies things. Convertible note agreements are short, maybe ten pages at most, and they can often be found online and modified according to the template.

Instead of the high cost of hiring a lawyer to transfer equity, the documents for a convertible note can often be found online. As a result, they can help generate quick funding in exchange for onle a few hundred to a thousand dollars. For a company that has limited time and financial resources, that is a tremendous advantage over complicated agreements.

Key Takeaways:

  • Convertible note are a form of debt taken on during seed funding that converts into equity when a startup begins an actual equity round of funding (usually in series A).
  • Convertible notes are preferrable to startups because they are quicker, easier, and cheaper to issue than equity. They are better for venture funds because they make valuation more flexible.
  • You can find a lot of online templates for convertible notes that you can use. Usually a lawyer is only needed in a limited capacity when working out a convertible note agreement.

Links

Storytelling For Startups

In light of our recent Storytelling for Business course announcement, this Founder Friday, I wanted to talk about storytelling for startups and how you can improve your ability to pitch your startup.

I have four basic pieces of advice:

  1. Set up a problem. Do this before you talk about your startup or what you do. Convince the listener that the problem your product is trying to solve is real and significant.
  2. Stop with the Jargon. Don’t talk about about “leveraging big data analytics and optimizing the social graph” because no one knows what that means. Really dumb down what you’re talking about to the level that a five year old could understand.
  3. Make it personal. Tap into people’s emotions by using language that relates to the five senses — show rather than tell. You ideally want to make it concrete and somehow relate to your listener. At the very least, you should be engaging your listener in a dialogue instead of just talking at them.
  4. Use common storytelling beats. Such as the 3 act structure (Exposition, Rising Action, Climax), the 5 story beats (Introduction, Incident, Stakes, Event, Resolution), or Dan Harmon’s Story Circle

No One Cares (About Your MVP)

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In this Founder Friday, I answer your questions about MVPs. Questions like:

“How early should I release my MVP?”

(It was basically just iterations of the same question haha)

Look, there are three parts to an MVP.

Product, that’s the obvious part.

Minimum, it should only have the features that it needs. Here you should tend towards less rather than more. It’s your baby and you’re afraid people are going to make fun of it, so you want to give it as much of a chance of success when you release it as possible so you keep adding all these features and polishing it up so it looks good.

But what you don’t realize is that by doing all that adding of features, you’re likely killing its chance of success in the real world — first, because you risk someone else coming in and building it before you, and second, because more features and more polish doesn’t necessarily mean better.

Many products that are successful are actually simplified products of things that already exist. Twitter is just Facebook without all of the other features, and a 140 character limit.

But what counts as minimum? Well that depends on the second word, Viable.

You will only have a GUESS as to what minimum features constitutes a viable product, and you have to actually release it to see if your guess is right. If your product is too minimal to be viable when you release it, then it won’t get usage. So what? No big deal. At least you didn’t waste any time building additional stuff that no one needed.

Then you can go back to the drawing board and think about how your product needs to change in order to be viable. But at least you got really useful information.

That’s one thing that a lot of people don’t realize. If you release your product and it’s not viable — aka no one uses it — then no one will care. It’s not like everyone will know your product is lame and will boycott it and never use it again. No — repeat after me: NO ONE CARES (about your MVP). And that’s a good thing. Now go learn something.

How Will You Make Money?

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You should have an answer to the question “How will you make money?” early on. You may even have several answers. It needs to be plausible, and people (like investors) may push back and argue with you about whether or not it’s a feasible business model. If you’re asking people for money, it’s a question you will have to deal with so you better be prepared for it.

That being said, you pointed out a few important things. For one, it’s okay to not be sure which will be the ideal business model or price. The process of getting to profitability is something you’ll have to face eventually if your startup continues to grow, but you may be able to push it off for a while in favor of focusing on growing usage. That’s the second point, if your product is growing quickly, you’ll often find investors willing to fund your growth despite the lack of a proven business model.

There are only a few major business models though: Advertising, Subscription, E-commerce, Business Development, and Lead Gen are some of the major ones.

Let’s take Facebook as an example. In the early days, Facebook was growing so fast that they were able to get a ton of money before they had to worry about their business model. But it was pretty clear their business model was going to be advertising. It’s a fairly straightforward path to monetization for a social network — though not all social networks monetize solely through advertising (LinkedIn charges users for premium accounts).

There are some others (like Medium) where the business model is still unclear, but I bet that the founders have a path (or several) towards monetization in their heads.

Yes, solving a problem should be the most important thing for you to focus on. But the reality is that if you’re trying build a big business, you have to have an idea how it’s going to be a lucrative problem to solve.